I think it's nothing as dramatic as (1). Just that instead of holding USD currency, they're holding equivalent "commercial paper"[1]. This means that everything will be ok as long as they can sell these bonds when the time comes. But if any of the held bonds fail or decrease in value, Tether will be in serious trouble.
I could see Tether becoming insolvent if/when there is another financial crisis that reveals some of these bonds as junk.
I can definitely see that being the case. The only issue here is that if you're actually just holding bonds and not cash, saying your currency is on a USD standard is patently false.
If your currency is backed by some kind of non-cash instrument, then what you've actually got is some kind of ETF like structure, not a currency qua exchange currency.
